Here we go again. Six months ago, I presented my thoughts about a report by Chinese NGO Institute of Public and Environmental Affairs (IPE) that leveled complaints against the IT/Electronics industry and the overall performance of nearly 30 major manufacturers and their respective key parts suppliers. The report focused on “the openness of IT firms and their responsiveness to reports of environmental violations at suppliers”. Concerns were raised in the report regarding levels of environmental toxins and pollutants being discharged in rivers and streams and into air sheds.

Worker complaints about unsafe working conditions and acute health problems were presented. The IPE gave opportunities to every company referenced in the report to initiate an open and two-way dialogue, and most did …except Apple Electronics. According to the report, Apple was more secretive about its supply chain than almost every other American company operating in the China. Apple came up among the laggards among 29 major electronics and IT firms in a transparency study drawn up by a coalition of China’s leading environmental groups.

These are the iPad and iPod guys for crying out loud! The evolutionary wizards who have shaped and fundamentally changed the way that most consumers behave, work, interact and get on with their daily lives. Those guys who at one point this summer became the wealthiest company in the United States…this before iconic CEO Steve Jobs retired.

Apple- Skinned Again

Following the early 2011 report, the IPE performed five more months of research and field investigations and reported that “the pollution discharge from this enormous industrial empire has been expanding and spreading throughout its supply chain, seriously encroaching on the local communities and their environment… the volume of hazardous waste produced by suspected Apple Inc. suppliers was especially large and some had failed to properly dispose of their hazardous waste.”

The IPE reported (rather colorfully I might add) that 27 suspected suppliers to Apple had known environmental problems. The IPE noted that in Apples ‘2011 Supplier Responsibility Report’, “where core violations were discovered from the 36 audits, not a single violation was based on environmental pollution. The public has no way of knowing if Apple is even aware of these problems. Again, the public has no way of knowing if Apple has pushed their suppliers to resolve these issues. Therefore, despite Apple’s seemingly rigorous audits, pollution is still expanding and spreading along with the supply chain.”

IPE reported that “during the past year and four months, a group of NGOs made attempts to push Apple along with 28 other IT brands to face these problems and the methods with which they may be resolved. Of these 29 brands, many recognised the seriousness of the pollution problem within the IT industry, with Siemens, Vodafone, Alcatel, Philips and Nokia being amongst the first batch of brands to start utilizing the publicly available information. These companies then began to overcome the spread of pollution created by global production and sourcing, and thus turn their sourcing power into a driving force for China’s pollution control. However, Apple has become a special case. Even when faced with specific allegations regarding its suppliers, the company refuses to provide answers and continues to state that “it is our long-term policy not to disclose supplier information.”

The IPE offered its opinion that “Apple has already made a choice; to stand on the wrong side, to take advantage of the loopholes in developing countries’ environmental management systems, and to be closely associated with polluting factories.”

IPE concluded that Apple needed to own up and be accountable for its supply chain for the following four reasons:

“… any company that produces a large amount of hardware must bear the responsibility for the environmental and social costs incurred during the manufacturing process.

Secondly, the suppliers who violate the standards for levels of pollutants emitted and who ignore environmental concerns and workers’ health do these things with the aim of cutting costs and maximizing profits.

Thirdly, Apple Inc. understands that when passing the blame for social responsibility it can be difficult to pull the wool over the eyes of the general public…; and

Fourthly, many people do not understand that Apple and other brands’ outsourcing of production is not the same as ordinary purchasing behavior. Various sources of information show that Apple is deeply involved in supply chain management—from the choice of materials to use to the control of clean rooms in the production process.”

So What’s Wrong With Apple?

Apples image problem appears to be getting worse before it gets better and it may be more than just a public relations problem; and it’s not just in China that Apple is facing criticisms. Apple, like most consumer electronics manufacturers is a major user of highly sought after precious minerals, many of them associated with conflict areas (so-called ‘conflict minerals’). Apple in fact sources tin from 125 suppliers that use 43 smelters worldwide. That’s an awful big challenge from a supply chain management perspective. But Apple was still a bit slow to step up like other key IT companies like Dell and Intel and collaborate with the Electronics Industry Citizenship Coalition in developing a framework to address conflict mineral traceability.

Further complicating the issue is the sheer size of Apples supply chain and the general difficulty that comes in managing dispersed multi-tired supply chains in other countries. In an excellent piece published in GreenBiz this week, Environmental Defense Fund Project Manager Andrew Hutson suggested that “If you’ve got an office in Shenzhen or Hong Kong, it’s very hard to keep tabs on the perhaps thousands of factories you have across China in any given moment”. The article went on to discuss how scrutiny can sometimes lead contractors to move factories to more remote areas, farther away from watchdogs, suggesting that “the sheer distance from headquarters created by chasing low-cost labor to developing countries can effectively reduce accountability”. While cheap labor in far off lands certainly has its benefits, clearly it has its disadvantages and Apple is paying the price.

Many people have asked me over the past half-year why Apple is being uncooperative or secretive. Well, “secrecy” has always been part of the Apple mystique, but of course so has evolutionary and disruptive innovation. The problem is when it comes to corporate social responsibility and sustainability, transparency is the name of the game, not secrecy. In this “WikiLeaks” world of ours, mystique only gets companies mired deeper into areas of suspicion and distrust.

Photo via Michael Holden under Flikr CC License

But perhaps there is more to the issue to noodle on. Is it entirely possible that Apple isn’t ignoring the problem, but rather its supplier network is just too big to handle and they lack the tools, systems and technologies to perform adequate supplier training and oversight? Or is it that Chinese regulatory agencies also lack the resources or institutional oversight necessary to monitor compliance over in-country industrial manufacturers that service multiple consumer brands? Or is it possible that as consumers our insatiable appetite for Apple products is partly responsible for creating such high demand that Apple must reach out to hundreds if not thousands of suppliers to fulfill its orders and keep Apple product lovers happy? Or is the problem a combination of rampant, unsustainable consumerism, poor regulatory oversight, a supply chain ‘gone wild’, AND a deviated moral center on the part of Apple (as the IPE suggests). You see, its complicated and maybe, just maybe, we should all take a close look in the mirror and question our own culpability in this mess.

For any of my dedicated readers, I am by no means being an apologist for Apple. You all know where I have stood in the past by constructively calling for Apple to step up and be as evolutionary on corporate social responsibility and sustainability matters as it is with its products. I noted in my prior post the many key steps that Apple can and must take to effectively make a difference in its supply chain. In addition Treehugger writer extraordinaire Jaymi Heimbuch offered some outstanding advice to new CEO Tim Cook, not the least of which was “requiring transparency in the supply chain and being more direct with suppliers about standards”. My advice is simple Mr. Cook: show humility, take responsibility, and act swiftly and collaboratively.

Rest assured there are more activist organizations shaking Apples tree. And what I fear (as Apple should too), is that one day all that shaking will bring that big old tree down.

In a comprehensive study released last week by the United Nations Global Compact and Accenture, a survey of 766 CEOs from around the globe indicate that despite the economic downturn, sustainability will be critical to the future success of their companies. An amazing 93% of CEOs indicated that “a tipping point” could be reached that integrates sustainability with core business processes and systems, and its supply chains. http://bit.ly/cS93dR

So this suggests that ‘triple bottom line’ (TBL) practices and measurements will become commonplace in business…or will it. Perhaps there is another way of looking at this trend given the top-down commitments that CEO’s believe are necessary to create this massive shift in corporate behavior. This point of view is called “triple top line”, but has generally been trumped by its “bottom line” twin.

The total revenues an organization reports on their income statement. While many activities within an organization are focused on reducing costs, initiatives such as innovative product and service development focus on creating more valuable and desirable offerings that increase revenues. Attention to human and natural capital (as well as financial capital) can often increase revenue by differentiating a company and its offerings in a beneficial way to the market. When this is done poorly however, it can be seen as green-washing and results in the opposite effect.

In contrast, bottom-line refers to Net Income (top line revenues – expense). Bottom-line activities typically focus on cutting expenses in order to improve income. William McDonough also coined this term from a design perspective in his landmark book Cradle to Cradle: Remaking the Way We Make Things (2002, North Point Press)

The effect that attention to sustainable management of natural, financial, and human capital has to an organization by increasing revenues (by offering more desirable products and services) and reducing costs and expenses throughout operations (through more streamlined operations. While many of these benefits are measured in terms of triple bottom line accounting, even more valuable are their effects to a company’s top-line financial performance because they require less capital investment and reduce the cost of capital.

In the UN/Accenture report, CEOs cited several barriers to achieving their sustainability goals, including ‘organizational silos’, competing priorities and lack of ‘value recognition’ by investors. To counteract these barriers, several steps were needed, including CEO leadership to create real, value-added and long term change. Specifically, five key areas were mentioned:

Shaping consumer preferences for sustainable products.

Training, training, training on sustainability issues- not only for the rank and file but managers too.

Improved investor communications with investors to create a better value proposition about sustainability.

Improved TBL metrics and communication of the value of business in society.

Partnering with governments to shape policy and regulation and create a level playing field.

A "Triple Top-Line" Strategy Yields Enhanced Business Growth

In sustainable terms, both a top-line and bottom-line focus is important. However, many recent efforts to slash expenses in the short-term can actually hurt long-term sustainable value. Like the UN/Accenture study suggests, a focus on increasing top-line value through innovation, lean thinking, and smarter brand enhancement can lead to more sustainable and profitable growth. I offer a simple framework to start down the path of sustainability from a top line perspective that recognizes human and natural capital as well as financial aspects of business.

1. Understand the current situation.

Gain awareness of the context in which environmental top line value can be realized.

Take stock of the organization’s core business strengths / strategies.

Identify the environmental aspects of the organization’s processes and services in each link of the organization’s value chain.

Identify customer environmental challenges and how the processes and services relate to customer needs.

Develop a business case for moving forward.

2. Develop a strategy.

Decide upon a strategy for creating environmental top line value that supports the organizations business strategy and takes advantage of the organization’s strengths.

Develop a top line strategy that will be a best fit for the organization.

Consider how the strategy will address sustainable business practices.

Determine whether any changes are needed to the existing business model or strategic plan to realize the strategy.

Develop an action plan to implement the strategy.

3. Choose initiatives and measure progress.

Develop and implement initiatives that will bring the strategy to life.

Consider how the organization’s existing processes and services can be positioned to address the chosen strategy, using the case studies for inspiration.

Examine each link of the product value chain to identify potential initiatives, such as reuse of recycled materials, resource optimization, reduced energy or water consumption, all of which can create top line value.

Be realistic about how process changes that can have direct environmental benefits fit into the overall set of differentiating features and benefits of the process. Do not assume that consumers will be willing to pay a price premium or accept performance or quality trade-offs.

Examine customers’ value chains to identify top line opportunities to meet customer expectations and support their sustainability initiatives.

Identify potential partnerships with stakeholders that will lead to top line value by promoting collaborative supply chain management.

4. Gain internal alignment.

The process of aligning an organization around the importance of taking action begins at the time an organization first develops an awareness of the context in which environmental top line value can be realized, and carries all the way through implementation of the top line strategy.

Gain buy-in from top management.

Communicate the business case for moving forward.

Identify internal champions within the organization who will move the top line initiative forward.

Start with pilot efforts to test the waters and generate early successes.

Communicate early successes.

5. Maintain the momentum.

Develop processes for maintaining the momentum of the top line initiatives.

Create a “change management” process to build environmental factors into new or modified processes or activities.

Develop business-based metrics of environmental and management and top line success.

Develop an award and recognition program for ideas or projects that result in environmental and/or management top line value.

Integrate environmental stewardship and associated activities with all operations.

Raise the capabilities of the customer service function to probe for and address customer-specific environmental or social responsibility issues/ concerns.

By following this simple ‘plan-do-check-act’ process, companies (large and small) can create upstream supplier alignment, downstream value for their customers and maintain a more secure competitive financial position in the global marketplace.

I believe the distinction between a good company and a great one is this: A good company delivers excellent products and services; a great one delivers excellent products and services and strives to make the world a better place. —William Clay Ford Jr.

This week, I am sure that you are reading this along with the many other blogs that mark the 40th anniversary of Earth Day. For 40 years, as Americans, we have aspired to change the world through enhanced environmental consciousness, policy making, and technological innovations that drive sustainability. In the U.S. we have lurched forward, sputtered badly, recovered, then stopped all together, then jumped forward again. So our choices and actions moving forward in this new “green economy” have not been entirely without influence or challenges, from ourselves and from nations afar. The only certainty is that it’s our own actions that can shape the path of our own organizations, communities and markets.

Disruptive technology and disruptive innovation are terms used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically by being lower priced or designed for a different set of consumers. http://www.claytonchristensen.com/disruptive_innovation.html. Christensen’s’ theory, featured in both “The Innovators Dilemma” and “The Innovators Solution” provides a prescription for a small entrant with less resources to compete with and beat a large incumbent. A quick look at the Disruptive Innovation model is at http://www.youtube.com/watch?v=DaKgMcFP4Mo

Disruptive innovations either create new markets or reshape existing markets by delivering relatively simple, convenient, low-cost innovations to a set of customers who are ignored by industry leaders. Historically, companies that dominate an industry have had little interest in pursuing these types of innovations because profit margins are often lower and the innovations don’t address the needs of those companies’ best customers. http://www.innosight.com/documents/diprimer.pdf

What does this have to do with “sustainability”? I had the chance to participate in a recent Leadership Summit here in Portland, hosted by the University of Oregon. The goal of the summit was to vette business and sustainability leaders in Oregon/SW Washington are as to how the U of O Center for Sustainable Business Practices could serve as a catalyst for innovation and bring sustainable solutions to the marketplace in Oregon and beyond. One goal that the Center has is to seek innovative approaches that can break the endemic boom-bust cycle that Oregon and many western states have often found themselves in. Never mind that there are tax related issues or brittle governance, or well intentioned but ineffective public-private partnership infrastructures that add to the fiscal malaise.

The discussion that ensued was interesting and of particular note because of the many references to disruptive technology. From this dialogue, it became clear that collaboration- finding ways to harmonize research, policy, manufacturing and service – is vital to a stable, sustainable economy. It was generally agreed that in order to support meaningful job growth, an educated community and sustained economic performance, two things must happen: 1) all parts must be working together and 2) there needs to be a policy/governance, educational, and public-private infrastructure that supports disruptive technology and innovation.

A book that I have been reading, The Silver Lining, A Playbook for Uncertain Times, by Scott Anthony, provides some answers as to how communities and organizations can move forward to realize opportunities in their markets. This 10-point checklist synthesizes The Silver Lining‘s key messages and provides practical guidance for leaders. Each item links to a blog post describing the item in more depth.

Finally, I want to share with all of you a seminal piece which I recently purchased from the Harvard Business Review (HBR) and that I “tweeted” about last fall http://bit.ly/2yfirf. Please read this! Authors Nidumolu, Prahalad, and Rangaswami have found that the quest for sustainability can unearth organizational and technological innovations that yield both top-line and bottom-line returns. That quest has already begun to transform the competitive landscape. The authors found that companies on the journey to sustainability go through five distinct stages of change:

viewing compliance as opportunity

making value chains sustainable;

designing sustainable products and services;

developing new business models; and

creating next-practice platforms.

By going through these key stages of change, the study found that “sustainability isn’t the burden on bottom lines that many executives believe it to be. In fact, becoming environment-friendly can lower your costs and increase your revenues. That’s why sustainability should be a touchstone for all innovation. In the future, only companies that make sustainability a goal will achieve competitive advantage. That means rethinking business models as well as products, technologies, and processes.”

This research was for me transformative and insightful, and offers compelling reasons for embedding sustainability into operational practices and strategic business strategies.

Whether you read Anthony, explore Christensen’s ideas or the review the HBR article, history shows us that innovation flourishes, no matter how dark the times. You can either reflect on this time in our economic recovery as the beginning of the end or a jump-start to transform your business or your market space. It all depends on your actions, so get innovative now!